Investment advisers, broker-dealers, and other regulated entities should be aware that the documents they provide to the United States Securities and Exchange Commission (the “SEC” or “Commission”) during examinations now have less protection from public disclosure than initially provided for under the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Act”). On October 4, 2010, President Obama signed into law a bill amending Section 929I of the Act, which provided expansive protections from public disclosure of information produced to the SEC by regulated entities. Recently, Section 929I was the focal point of a controversy regarding the extent to which the Act exempted the SEC from compliance with the Freedom of Information Act (“FOIA”), which we called to your attention in a prior SecMail. The amended law narrows, but does not eliminate, the SEC’s ability to protect certain documents from public disclosure.  

As originally enacted, Section 929I granted significant protection from public disclosure — both under FOIA and in response to subpoenas served on the Commission — for documents and information produced to the SEC in connection with the Commission’s examination and surveillance functions and in furtherance of, among other things, its regulatory or oversight activities. Although initially enacted with little debate, lawmakers quickly became concerned that Section 929I could be read broadly to shield from disclosure documents collected by the Commission in a multitude of contexts. SEC Chairman Mary Schapiro appeared before Congress to assure lawmakers that Section 929I did not apply as broadly as some had feared, and stated that the Commission’s staff would invoke the provision only to address potential gaps in pre-existing FOIA law and to import the protections provided by FOIA to non-FOIA litigation. Chairman Schapiro also emphasized in her Congressional testimony that Section 929I was critical to assuaging fears of regulated entities that the Commission might be forced to disclose to the public information collected during its examination or surveillance programs, thereby resolving a long-standing impediment to the SEC examination staff’s ability to obtain highly sensitive information in a timely manner.  

Proclaiming that Section 929I was intended “to ensure that the SEC had access to the information that the Commission needed to protect American investors -- not to shield information from the public,” Senators Patrick Leahy and John Cornyn led the effort to repeal and replace portions of Section 929I.1 The amended law focuses on FOIA Exemption 8, which exempts from disclosure matters that are “[c]ontained in or related to examination, operating, or condition reports prepared by, on behalf of, or for the use of an agency responsible for the regulation or supervision of financial institutions.”2 Under the amended law, the SEC is expressly identified as an agency responsible for regulating and supervising “financial institutions,” and any entity that the SEC is responsible for regulating, supervising, or examining is deemed a “financial institution” under Exemption 8.  

In clarifying the definition of “financial institution,” the amended law extends at least some level of FOIA protection to documents related to examination, operating, or condition reports for all entities regulated by the SEC. For some regulated entities (e.g., credit rating agencies, transfer agents, and municipal advisors), the amended law removes any ambiguity as to the reach of FOIA Exemption 8. For others, the amended law changes nothing. For example, registered broker-dealers and investment advisers have long held the view that Exemption 8 applies to them, and that view has been supported by the courts. More importantly, by relying exclusively on FOIA Exemption 8 for protection, the amended law provides no certainty to regulated entities that records and information collected by the Commission in its examination or surveillance efforts — including proprietary and customer information — will not be disclosed to third parties.  

Regulated entities producing documents to the Commission’s staff should consider the following three issues arising under the amended law:  

The amended law applies to examination, operating, or condition reports. Compared to the potentially broad scope of Section 929I, Exemption 8 applies only to examination, operating, or condition reports prepared by or for the Commission. The extent to which documents produced to the Commission’s staff outside of the examination process are covered by FOIA Exemption 8 remains unclear. In addition, there is case law that supports the position that records and information collected during the examination are “related to” examination reports and, therefore, are covered under Exemption 8. The extent to which a particular record will be deemed “related to” an examination report, however, depends on the individual facts and circumstances, and is subject to some litigation risk in the event that a FOIA request is filed.  

The SEC takes the position that it maintains discretion to disclose records, even if they are covered by Exemption 8. Even if FOIA Exemption 8 applies to a particular record, the Commission takes the view that it has the power to authorize discretionary public disclosures where the need for confidentiality is outweighed by the public’s interest in accountability and transparency. As long as a party producing records to the SEC makes a request for confidential treatment under the SEC’s FOIA regulations, those regulations afford that party an opportunity to object to any such disclosure and to appeal an adverse decision, but do not guarantee non-disclosure.  

The amended law does not apply to third-party subpoenas. Perhaps the most significant difference between the original version of Section 929I and the amended law is the loss of important protections in the context of non-FOIA third-party litigation. The Commission often receives third-party subpoenas seeking documents provided by regulated entities, and the FOIA exemptions are unavailable in those situations. Without the express protections afforded by the original version of Section 929I, the Commission is left to rely on arguments of undue burden, relevance, or common law privileges to protect information provided by regulated entities from discovery in non-FOIA litigation. Historically, those arguments have met with varying degrees of success, but provide no comfort to regulated entities that documents produced to the Commission will be protected from disclosure.